Estate Planning 101 – Chapter 1: What is Estate Planning?

Regardless of whether my clients come to me already having a Will, or whether they’re brand new to estate planning, many clients have a number of misconceptions about what estate planning is, and what it entails.  Many clients come to me for help drafting a Will, but without knowing really what a Will is, what it does, or whether they need one.  Many come in asking me prepare for them a Power of Attorney without really knowing… why?  Estate planning can be daunting, and complicated.  But, it doesn’t have to be!

Thus, Estate Planning 101.  This will be a series of posts that explain the basics of estate planning.  What is it?  What is involved?  Why do I need it?  What do I need to do to have an Estate Plan?  We’ll cover all of this, but we’ll do it one step at a time.  My goal is to demystify estate planning, clear up some issues, educate you a little bit, and have some fun along the way.

Since this is the first post in my Estate Planning 101 series, I feel like it’s appropriate to start at the beginning with a definition.

What is an “estate”

When I refer to an “estate” or “your estate,” think of it, quite literally, as your stuff.  That is, what you own when you die.  If you die with only $5 in your pocket and the clothes on your back, that $5 and those clothes are, collectively, your estate.

So, what is Estate Planning?

Estate Planning is essentially planning for your death.  I know that’s blunt, but I never said I’d sugar coat this.  No one likes to talk about it, but the fact of the matter is that one day you will die.  If this is news to you, I am sorry to be the one to break it to you.  I am not a licensed therapist or psychiatrist, but if you need help coping with your inevitable demise, I am sure we can work together to find a licensed professional to help you out.

Now, when I say, “planning for your death,” do I mean setting up your own funeral arrangements?  Well, that can certainly be part of it.  Many people prepay their own funerals, and if you have the means and desire to do this, by all means, go for it.  But what I (and other estate planning lawyers) tend to focus on is really, what happens to your stuff when you die?  What is your plan for what happens with your estate?

Your estate plan, then, is mostly going to be determined by two main questions:

  1. What do you own? (What are your assets?); and
  2. Who do you want to own your assets after you die.  (That is, who do you want to be the beneficiaries of your stuff?)

More likely than not, when you die, you’ll leave behind “assets“.  That is, you’ll leave behind… stuff.  Maybe you leave behind substantial wealth, maybe you leave some real estate, or maybe just a little bit of cash and a few personal items.  No matter what it is, “You can’t take it with you.”*  So, we are here to help you figure out what to do with your stuff.

The most basic element of estate planning is what most people think of when they think of: drafting a Last Will and Testament or, just a Will.  I’ll do another post in the future that goes into a little bit more detail about Wills, but for now, it’s enough for you to know that a Will is a document that directs where your stuff goes after you die.  For example, maybe you want your house to go Henry, your car to go to Cathy, your money to go to Maggie, and your jewelry to go to Jesse.  Your Will would name Henry as the beneficiary of the house, Cathy the beneficiary of your car, Maggie the beneficiary of your money, and Jesse the beneficiary of your jewelry.  Simple enough, right?

Well… probably not.  Because, while having a Will is a major part of estate planning, it is far from being the only part of estate planning.  In fact, the Will is often not even the most important part of estate planning.  This is simply because we have all types of assets.

Many of us won’t die with one bank account solely in our own name.  Right now, you probably own multiple assets.  Some of your assets may be solely in your name, other assets (like a bank account or a house) may be jointly owned with other people.  Do you have an IRA?  A 401k?  Other investment accounts?  Do you own stocks, bonds, or mutual funds?  How about life insurance or other annuities?  Do you own real estate?  Do you own multiple properties in multiple states?  What about pets? All of these are assets.  But, not these assets are “probate assets”.  (I’ll write about probate in more detail at a later date, but, in short, a “probate asset” is generally an asset that is controlled by the Will.)

It is important to recognize that the type of asset you own will drastically impact your estate plan, so you should speak with a trusted attorney who can advise you, based on your assets, how to set up your estate plan.

But what type of asset is only one part of the equation.  The next part is, who do you want to get your stuff?  That is, who do you want to be the beneficiaries of your estate?  Maybe it’s your spouse, or children, or another family member or friend.  Maybe it’s a charity.  Or maybe it’s a combination of all of the above.

Pennsylvania has an inheritance tax (aka death tax).  Fun name, right?  For now, the most important thing you should know is that who gets your stuff will determine how much money will need to be handed over to the state in the form of inheritance tax.  Children are taxed at one rate, brothers and sisters at another rate, and friends at yet another tax rate.  Spouses and charities?  No tax.

Want to hook your grandchildren up?  Great!  But, did you know that Pennsylvania has laws that prohibit minor persons from having direct control over substantial assets?  That is, sure, you can leave $100,000 to your 8 year-old grandchild, Timmy.  But, Timmy won’t personally see a dime of that until he’s 18.  And even then, do you really want Timmy to have access to $100,000 (or whatever is left of that $100,000 after Timmy’s parents get their grubby little hands on it) as soon as he hits 18?  I mean… maybe you were the most responsible 18 year-old in the history of 18 year-olds, but I sure wasn’t.  Again, this is where speaking with an attorney can help make sure that your loved ones are provided for, but in a responsible manner.

And that’s only part of your estate plan.  The other parts of your estate plan should ensure your assets are protected even before you die.

The fact of the matter is most of us will not die suddenly.  Most of us will die in old age.  Many of us will die after long, complicated illnesses.  Many of us will require incredibly expensive long term medical care that will drain us of our money.  And many still will lose mental capacity (that is, essentially, being able to think clearly and make decisions for ourselves) long before we pass away.

So, through various estate planning documents like Legal and Medical Powers of Attorney (aka POAs), Advanced Healthcare Directives (aka Living Wills), and Trusts, your estate plan can help you navigate the end of your life in such a way that protects your assets from exuberant medical expenses and taxes, while ensuring you and your loved ones are sufficiently provided for when the time comes.

I know I didn’t spend too much time on POAs, Living Wills, or Trusts, but those will be discussed in greater detail later on down the road.  The point of this post was to simply explain what estate planning is, and what it entails.

This has been a very very general overview of estate planning.  Hopefully it helped answer some questions and clarify some things.  Of course, it’s more likely that it just raised a whole handful of other questions.  That’s okay.  There’s a lot to cover.  That’s why I’m tackling this one issue at a time.

As always, if you have any questions about your own estate plan, please feel free to contact me.

*You super can take it with you.  If you want to be buried with your stuff inside your casket with you, go for it.  Just make sure you put it in your will.

 

The information contained in this post is specific to the laws in the Commonwealth of Pennsylvania.  Nothing on this website should be construed as legal advice.  If you believe you may need legal counsel, you should contact an attorney.  Commenting on or contacting me through this website does not establish an attorney-client relationship.